WASHINGTON, November 11 – An expanded bailout for AIG and more bad news across corporate America sent US markets falling Monday, as the US Treasury\’s point man on the banking crisis said the financial system "remains fragile."
Despite the news of China\’s massive economic stimulus program, shares on Wall Street dropped as the bad US news fell heavier on the markets.
The Dow Jones Industrial Average fell 0.82 percent to 8,870.54 at the market close; the tech-heavy Nasdaq dropped 1.86 percent to 1,616.74, and the broad Standard & Poor\’s 500 index retreated 1.26 percent to 919.22, according to preliminary closing figures.
As AIG, one of the key players in credit default swaps — the complex financial instruments at the heart of the global financial turmoil, turned in a third-quarter loss of 24.47 billion dollars Monday, Washington tossed its already-record 123 billion dollar rescue plan out the window for the giant insurer.
In its place the US Treasury said it was putting up 152 billion dollars for AIG, including 40 billion in new equity, a 60 billion dollar loan, and the rest to buy up distressed securities.
"This action was necessary to maintain the stability of our financial system," said Neel Kashkari, the head of the Treasury\’s 700 billion dollar rescue operation for the financial industry.
"We recognize that the financial system remains fragile and we continue to stand ready to prevent systemic failures," he said.
There was mostly bad news from US business Monday. Mortgage finance giant Fannie Mae said it lost nearly 29 billion dollars in the third quarter and US electronics retailer Circuit City filed for bankruptcy protection.
And General Motors shares plunged more than 30 percent Monday after an analyst forecast their price would fall to zero, saying that even if there is a government bailout of the auto giant, shareholders would not benefit.
"We are lowering our target on GM equity to zero dollars," the Deutsche Bank report said.
In Europe stock markets closed firmer in the wake of China\’s four trillion yuan (586 billion dollars) economic stimulus plan, which calls for tax cuts and increased spending corresponding to about seven percent of China\’s gross domestic product over the next two years.
But the news from Europe was not all buoyant.
German logistics giant Deutsche Post said it would cut 9,600 posts as part of restructuring of the loss-making DHL express mail delivery activities in the United States.
Telecoms giant Telekom Austria, 27.37-percent owned by the state, confirmed that it would cut 2,500 jobs out of its 11,400 positions in Austria in the next few years, following a drop in income.
That followed an announcement over the weekend that Austrian Post was to shed 9,000 jobs and close three-quarters of its 1,300 offices by 2015.
Recession fears meanwhile deepened in Italy with figures showing industrial output slumped 2.1 percent in September from August, the biggest single-month drop in a decade.
The data deepened concern that Italy\’s gross domestic product (GDP) would contract for a second quarter running — the definition of recession — in the July-September period after a 0.3 percent drop in the second quarter.
Figures also showed industrial production in France falling by 0.5 percent in a month.
And in Britain, the pound hit a historic low against the euro after a record drop in producer prices stoked expectations of further interest rate cuts from the Bank of England.
The euro earlier spiked to 82.09 pence, the highest level against the pound since the creation of the European single currency in 1999.
In late New York trade, the euro rose to 81.73 pence from 81.25 pence late Friday.
At the Global Economy Meeting of the Bank for International Settlements in Sao Paulo Monday, Jean-Claude Trichet, head of the European Central Bank, said that the financial crisis and the multi-billion-dollar responses to it have left both disinflationary and inflationary pressures requiring different approaches.
"We are certainly facing global financial turbulences that are intense and that have intensified," he told reporters.
But reactions to the continuing crisis "had to be considered by each country" in relation to their set of circumstances, he said.
Those countries with no room for maneuver in terms of cutting interest rates or stimulus spending, he said, "should be very cautious for all reasons, including because they could destroy confidence if they would be bold in situations where they already have an imbalance."
Trichet praised China for its approach with the massive stimulus package.
"We considered that what had been decided by the Chinese authorities is certainly going in the right direction. The Chinese current account surplus was signaling room for maneuvering precisely to foster domestic demand," he said.